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Contract Of Indemnity: Rights and Liabilities Rights of an Indemnity Holder

The first step in discussing Contracts of Indemnity and Guarantee is to define both types of Contracts. An indemnity contract is one that is formed to compensate or protect someone against loss or to make good on a loss. When one person promises another that if the second person experiences a loss, the first person will make up the difference. An indemnity is a monetary payment made by party A to party B to compensate B for a specified loss.

The guaranto:

  1. May or may not be liable for the damage incurred by the indemnitee
  2. Indemnity might take the form of financial payouts, repairs, replacement, or reinstatement.
A contract of guarantee, in the same context, refers to an act performed to fulfil a promise or discharge the responsibility of a third party in the case of his default. The person who provides the guarantee is referred to as the "surety," the person whose default is covered by the guarantee is referred to as the "principal debtor," and the person to whom the guarantee is issued is referred to as the "creditor."

Definition

Indemnity

  1. Insurance against harm or loss, particularly in the form of a commitment to pay for such that occurs
  2. A sum of money provided as compensation for injury or loss


Contract of Indemnity

A contract of indemnification is one in which one party promises to rescue the other from damage caused by the promisor's own action or the conduct of any other person.

Illustration:
A agrees to protect B against the repercussions of any legal action taken by C against B for a fee of 200 rupees. This is a contract of indemnity.

Section 125 in The Indian Contract Act, 1872

In the event of a lawsuit, the indemnity holder has specific rights. In an indemnity contract, the promisee has the ability to sue the promisor if he acts within the scope of his authority. In an indemnity contract, the promisee has the right to collect from the promisor within the limits of his authority"
  1. whatever damages he may be obliged to pay in any action originating from any matter covered by the commitment to indemnify;
  2. all expenses that he may be forced to pay in any such litigation if, in bringing or defending it, he did not violate the promisor's directives and acted as it would have been appropriate for him to act in the absence of any contract of indemnification, or if the promisor allowed him to bring or defend the issue;
  3. all sums he might just have paid under the terms of any compromises of any such suit, if the compromise was not contradictory to the orders of the promisor it was one which is something the promisee would also have made in the absence of any indemnity contract, or if the promisor authorised him to compromise the action

Rights Of Indemnity Holder

In a lawsuit against the indemnity holder, he may have been ordered to pay damages and fees, among other things. In turn, if the indemnifier has promised an indemnity in such a case, he might initiate an action against the promisor (indemnifier) to recover damages and expenses paid by him. The relevant provision is found in Section 125, and it is as follows: 124. Rights of the indemnity holder The promisee has the following rights against the promisor in an indemnification contract if he acts within the scope of his authority:

If the indemnity bearer acts within the scope of his power, he may recover the following amounts:
  1. An indemnity-holder might well recover from the indemnifier all incidental, All costs which he may be compelled to pay in such suits if, throughout bringing or defending this, he did not contravene the order of a promisor, and acted as it would be prudent for him to act in the apparent lack of any contract of indemnity, or if the promisor authorised him to bring or defend the suit.

    Right to recover costs incurred in defending (Section 125(2)):
    • When pursuing litigation involving the purpose or action of the indemnity, the indemnity holder has the statutory right to collect reasonable fees and damages from the indemnifier.
       
    • In Pepin v. Chunder Seekur Mookerjee, (1880) ILR 5 Cal 811 case, the Court held that the expenses do arise while reducing or ascertaining or resisting the claim. Hence, the cost of such a nature can be recovered.
       
    • In Gopal Singh v. Bhawani Prasad, (1888) ILR 10 All 531 case, the Court held that only those costs would be recoverable that are supposed to be incurred by a prudent man.
  2. All damages that he may be forced to pay in any litigation arising out of any matter to which the offer of indemnification applies:
    Right To Recover Damages Paid In A Suit [Section 125(1)]:
    When a third party files a claim against the indemnity holder, it is widely recognised that the responsibility to pay the latter arises first and foremost for the indemnifier. The damages would undoubtedly be the outcome of the complete liability that the indemnity bearer was required to bear. The logical concept is that a person who acted on another party's faith should be compensated. An indemnity-holder has the right to recover from the indemnifier all damages that he may be forced to pay in any litigation relating to any matter covered by the indemnity contract.

    In Parker v. Lewis, (1873) 8 Ch App 1035 case, the logical principle of providing the indemnity to a person who had acted on the faith of another party is upheld. The Court laid down that it would be obvious for the person indemnified, who has altered his position and faced action for that action, to be indemnified and be protected by the third party.

    Once a suit is decided against the indemnified and he, being the judgment debtor, pays the money to the judgment creditor, or, when in a compromise, he prudently settles the dispute by paying the damages; indemnifier becomes absolutely liable to indemnify him (i.e. the decree becomes conclusive for the purpose of invoking indemnity), notwithstanding that the suit could have been brought or could have been appealed against.

    Also, if the indemnifier trusts indemnified to further appeal against the judgment, he will still be liable to pay under the indemnity contract to the indemnified, if the latter had paid the decreed amount under the previous suit.

    Only if the indemnified eventually wins will the judgement debtor pay the ordered sum to the indemnifier.

    In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the Court held that the suit, in which the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result, even though he was not a party to the contract. This is not an exception to the rule of res judicata rather; it is so because the claim against which the indemnification had been promised has been conclusively established.

    In Gokuldas v. Gulab Rao, AIR 1926 Nag 108 case, the Court held that the indemnifier cannot plead that he was not a party to a dispute hence the result should be implemented upon him.

    In Nallappa Reddi v. Vridhachala Reddi, (1914) 37 Mad 270 case, the Court held that the indemnifier cannot escape from the responsibility of providing the damages to the indemnified.

    In Anwar Khan v. Gulam Kasam, AIR 1919 Nag 126 case, the Court held that the measure of damages would depend upon the extent to which the person has been indemnified, if more than the amount, the indemnifier may refuse as well.
     
  3. All payments paid under the conditions of any compromise of any such litigation, provided the compromise was not contrary to the commands of the promisor and was one which the promise would have been reasonable to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the matter.

    Right To Recover Sums Paid Under Compromise Section 125 (3):
    This is analogous to the preceding right, except it occurs in the event of a compromise. An indemnity-holder also has the right to recover all amounts paid under the terms of any compromise of any such suit from the indemnifier, if the compromise was not contrary to the orders of the promisor and was one which the promisee would have made in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

    In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the court laid down the conditions for the claim by the promisee, to be valid. If the indemnity holder genuinely wants the amount to be recovered, certain conditions with respect to the compromise so effected would have to fulfill:
    1. The compromise should have been implemented legitimately.
    2. It was settled without the use of any collaboration.
    3. It has not been impeached for being an immoral deal.
     

Indemnity Provisions and Enforceability in the United Kingdom

In order to define an indemnity contract in the United Kingdom, English law used the adage "you must be damnified before you may claim to be indemnified. This means that the promisee cannot seek indemnification until and until he has been injured. Under English law, one of the major requirements for compensation is injury.

The English law of indemnity is that the indemnifier will reimburse the indemnity holder only when the latter has suffered a loss, worked according to the indemnifier's instructions, incurred costs during suit procedures, or paid any sum in compromise. In the absence of loss, the indemnity holder cannot activate the contract of indemnification. Previously, the indemnity was only enforceable once the indemnity holder had paid the damages. After paying his damages, he might seek indemnity relief from the indemnifier.

However, such restrictions were presenting problems for the indemnity holder, who was unable to pay the claim out of his own money. In order to sort out relief, the Court of Equity abolished the idea of being damnified in order to be indemnified. In such a case, the indemnifier is obligated to indemnify for the guarantee made even if real damage does not occur.

Later, the enforceability of indemnity moved with Buckley LJ's decision in the case Richardson Re, ex parte The Governors of St. Thomas Hospital, where he declared, "Indemnity is not always conferred by return after payment." Indemnity demands that the party to be indemnified in the first instance never be required to pay"[1]( (1911)2KB 705, 715 (CA).).

Kennedy LJ correctly observed in another landmark case, Re Law Guarantee & Accidental, "that indemnity does not merely mean to reimburse in respect of the money paid, but to save from the loss in respect of the liability against which the indemnity has been given, because otherwise, indemnity may be worth very little if the indemnity-holder is unable to pay in the first instance"[2]( (1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA).).

The contract of indemnification in the United Kingdom has a far broader scope than in Indian law since the damage might be caused by an individual's actions or by an event or disaster, such as a fire. In India, however, only the first criterion holds true. Life insurance is not regarded an indemnity contract in the United Kingdom. This is due to the fact that the worth of a person's life cannot be defined, and if the loss is not certain, a contract of indemnity does not form. Furthermore, the United Kingdom recognises both implicit and written contracts of indemnification.
 
Basis Indian Law English Law
Types of Contracts Only express treaties of indemnification are recognised under Indian law. English law recognises both express and implicit indemnification contracts.
Cause of Loss In Indian law, the only way for a loss to occur is via the action of a human being. In English, the payment of losses is required for the law to be enforced.
Enforceability The enforceability of indemnification contracts is not addressed in Indian law. The source of loss in English law might be both human agencies as well as occurrences and accidents.
End-Notes:
  • https://lawtimesjournal.in/contract-of-indeminity/
    ( Yash Arya, Contract of Indemnity & Guarantee, Academia. Retrieved from )
Written By: Mohit Mandloi, Session: 2020-25, BA-LLB(Hons.) Semester III, NMIMS Indore

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